New Zealand’s regulated telecommunications regime splits the fibre market into wholesale and retail segments. Wholesalers like Chorus, Enable, Northpower and UFF can’t sell direct to customers. Instead, they provide wholesale services to retail service providers or RSPs. This model levels the playing field for retail telecommunications companies.
Until now, the UFB focus has been on what are known as Layer 2 services. The name Layer 2 comes from the OSI or Open Systems Interconnection model which describes how networks operate. There are seven OSI layers. For our purposes, only the first two layers are interesting.
Layer 2 is all about moving data between two points in a network. On New Zealand’s fibre networks this means wholesale companies sell pre-packaged, ready-to-run services that move customer data. We call this bitstream access.
RSPs take these services and, in some cases, rebrand them. In other cases, they might add further services of their own, such as video-on-demand, before selling them to their customers.
Most ready-to-run packaged services are a combination of upload and download speeds. There is a range of options, but these are limited. Popular Layer 2 fibre services in New Zealand are 100Mbps down and 20Mbps up, or 1Gbps down and 500Mbps up.
The wholesale fibre companies use their hardware and software to create bundled services. Bundled services sit on top of Layer 1. This is the physical fibre connection without any added optical or electronic hardware.
Unbundled fibre is when RSPs buy Layer 1 access only. In practice, this means they rent the physical fibre connecting the hardware and equipment they provide at their customers’ premises.
RSPs who buy unbundled fibre aren’t limited by the Layer 2 choices offered by wholesalers. They get to determine the services they sell the customer. It also means they take full control of the customer’s traffic. Every link in the chain is their responsibility.
Because they are free to create their own packages, unbundling companies often talk about being “free to innovate”. In practice, there’s not much room to manoeuvre when pushing binary digits through a pipe.
They can’t make the pipe bigger, but they can decide how a pipe is divided up. And they can’t tinker with the laws of physics to quicken the speed of light.
Unbundled RSPs are not restricted to the services that come from Layer 2 wholesalers. This means they can construct unique broadband plans. If, say, it turns out that consumers want 630Mbps down and 47Mbps up, an unbundled RSP can meet that demand.
With the market moving towards unmetered plans and gigabit speeds, innovation is often more a matter of what an RSP can take away from, not what it can add to, UFB.
According to research company Analysys Mason, one consequence of fibre unbundling is that service providers find it harder to differentiate products based on speed. In the end, they usually gravitate towards offering the network’s maximum performance.
The difference between copper and fibre unbundling
Fibre unbundling is new, but we’ve been here before with copper networks. New Zealand regulated the Unbundled Copper Local Loop or UCLL after the 2006 amendments to the Telecommunications Act.
The legislative changes that year also introduced UBA or unbundled bitstream access. In most respects, this resembles the UFB Layer 2 services offered on today’s fibre networks.
Copper unbundling worked well for some RSPs. It meant they could install their hardware in Telecom’s exchanges and serve their customers over the copper network. The Commerce Commission regulated the price. The regulator set these prices after looking at comparable markets elsewhere in the world. It was also a considerable discount to existing access prices.
RSPs unbundled around 100,000 copper lines out of a total of 1.8 million. While that’s not many, it had an impact on the market.
Subloop unbundling is a refinement of copper unbundling that gave RSPs access to roadside cabinets. It didn’t prove popular, largely because of the economics of dealing with 8000 cabinets as opposed to a few hundred exchanges.
To a degree, New Zealand’s broadband competition took off after copper unbundling. There are many reasons. First, Telecom was a monopoly network owner and a retail service provider at the same time. It was in direct competition with its wholesale customers. UCLL diminished that advantage. It gave service providers an alternative route to market. The gap between the UCLL price and the UBA price left RSPs with enough margin to make investment worthwhile.
New Zealand had hundreds of telephone exchanges where unbundlers could install their kit. (In comparison, the UFB network has 22,000 sites where unbundlers might install fibre-splitters.)
RSPs wanting to unbundle copper could cherry pick and only unbundle the most lucrative ones. In most cases, this meant exchanges where they already had a critical mass of customers. This would guarantee a return on the investment. It also reduced their risk and the cost of installing the necessary network hardware.
In most cases, customers were unaware whether they were on an unbundled line or not.
Economics of fibre unbundling
Much of the recent discussion about fibre unbundling assumes it would be like copper unbundling.
While there are similarities, there are also differences.
One consumer benefit of unbundling fibre is that Layer 1 access means the connection is not priced on bandwidth. In other words, the wholesale access price doesn’t change depending on speed. This is likely to accelerate users moving to plans that offer the highest speeds.
There are other differences too.
Copper connections entering homes and offices terminated in a traditional telephone jack socket. Customers could plug in their own ADSL, VDSL or other modems to this jack. Often, RSPs provided customers with wireless routers as part of a subscription package. But as the technology was standard, customers could buy routers off the shelf too.
Fibre connections need a fixed optical network terminal or ONT. This is usually hard-wired. Fibre companies install and own ONTs.
An RSP wanting to connect a customer could, in theory, buy the ONT from the fibre company that provided it. Or the RSP might choose to install its own kit. This is more likely as it gives the RSP more control.
Overseas fibre unbundling
Singapore is the only overseas market that already has significant fibre unbundling along the lines proposed for New Zealand. It’s a city state, with only 10 exchanges serving its entire population. There, the price of a gigabit fibre connection is about six times the price of a 100Mbps connection. In New Zealand, the gigabit price is less than twice the price of a 100Mbps connection.